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This is a question most revisited by aspiring investors like you. From the get-go, you should know that as long as you have spare change, it is possible to start investing in stocks. Thanks to online stockbrokers, low-to-middle-income earners can now pursue investing through a number of ways which will be explained later.
Just the Nuggets
- Make sure to know your investment goals, risk tolerance profile, and plans for diversification before finally investing in the stock market.
- You can start with any amount, even as little as $1 or the price of a single stock.
- Demo accounts are offered for free by some online stockbrokers as a way of giving you an experience of their platform.
- Fractional shares are bits, slices, or pieces of a single share of stock.
- Discount online brokers are commission-free platforms for buying and selling stocks using investment tools.
Know Yourself as an Investor
Smart investors have mastered how to risk their money wisely because they already know the answers to the following questions related to their investment goals, risk tolerance profile, and plans for diversification.
How long is your desired investment horizon? Would you need the money immediately before 10 years or beyond? What’s your reason for investing? Is it for your retirement, education, or simply just wealth accumulation?
Risk tolerance profile
Are you fuelled with the promise of great returns or unsettled by the looming possibility of big losses? What type of investor are you—conservative, aggressive, or somewhere in between?
Plans for diversification
Do you want to manage your own individual stocks? Do you prefer safer bonds (company or government loans with guaranteed investment returns) over riskier equities (shares of stocks)? Or a balanced portfolio (mixed investment of bonds and equities) like that of mutual funds or index funds?
If your answers to these questions are clear as mud, then this article will be helpful in laying out the important groundwork.
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How Much Do You Need to Invest in Stocks?
You can approach this in two ways.
How big can you start investing in the stock market?
The answer is—as much as you can without sacrificing your emergency funds. Or as much as you’re comfortable losing. Consider the money you’re investing as an amount you can afford to lose.
This is the more resounding question for beginner investors. Here are three appropriate answers they should hear:
- any amount by opening a demo account while saving to invest
- as little as $1 by buying fractional shares through online brokers
- the price of a single share of stock to minimize expenses through discount online brokers
3 Ways to Invest in Stocks with Little Money
Save to Invest While Using a Demo Account
If you don’t feel confident with your money now, you can first open a stock investing demo account. This option serves two purposes:
- buying some time to save up for your investments; and
- familiarizing yourself through a simulation of stock investing.
Suppose you just finished setting up your emergency fund and you’re gearing up for investments, particularly, stocks. While using a free demo account, use the time to accumulate more money for your planned investment just like how you saved up for your emergency funds. Ideally, you can buy a few shares between $200 and $1,000.
In the meantime, you can be productive by opening a demo account to practice. Some online stockbrokers offer this type of account to give you a free trial of their platform’s features. It’s a simulation that removes all the feared risks—real market, real prices, real platform—but uses fake virtual money. Although utilized the most by day traders to practice their strategies, long-term investors can also use it to understand how online platforms work.
Blue-chip stocks—shares of big companies that have proven to be financially resilient throughout their history—are the most reliable investments that you can take. But these companies don’t come cheap.
For example, Amazon’s share price recently is around $3,000. This amount might be too expensive for a beginner. Even with spare change, it would take long for you to save up for a single stock purchase. Remember—the earlier you start, the better.
But here’s the good news! You can start investing in Amazon even if you don’t have $3000. Through fractional shares, it’s possible to have a slice of a single share depending on the money that you have.
How are fractional shares possible?
The first is through stock splits decided by the company itself to lower its share price for the investors. Suppose Amazon announced a 3:2 stock split—it means you’ll get three shares for every two you own. So if you currently own one share, you get an additional 0.5 share—giving you a total of 1.5 shares. You now have fractional shares.
The second is through dividend reinvestment plans or DRIPs. When you enroll in a DRIP, your dividends will be automatically reinvested to buy more shares from the same company. Dividends are cash or shares given to you as an investor of the company. This amount is not big enough to buy a single share. What happens is that you acquire fractional shares equivalent to your dividend’s worth.
Both stock splits and DRIPs are applicable only when you have existing shares.
But what if you’re just starting out with your first shares?
Fortunately, online stock investing platforms made it possible to buy fractional shares for a start. For as low as $1, you can already buy a slice of Amazon shares. Here are just three examples of online platforms that allow the purchase of fractional shares with their corresponding fees and expenses.
Minimum amount to buy fractional shares: $1
Other fees: When transactions are made through the phone with the help of a live broker, the fee is $10 per transaction. But when done online, there are no commission fees.
Choose how much money you have available to invest. Then their system will convert the dollars into equivalent fractional shares. Fractional shares in Robinhood could be as small as one-millionth of a share with no commission fees.
2. Schwab Stock SlicesTM by Schwab
Minimum amount to buy fractional shares: $5
Other fees: There are no commission fees, but exchange processing fees are to be paid when selling stocks.
Buy slices of shares from companies included in the S&P 500 Index—a list of 500 large US-based companies that are used to benchmark the US stock market’s behavior. You can buy up to 10 slices at a time, with a maximum transaction of $10,000. To buy a stock slice, you must have a Schwab brokerage account. Don’t worry, they don’t have commission fees.
3. Stocks by SliceSM by Fidelity
Minimum amount to buy fractional shares: $1
Other fees: No other fees associated with commission and account service.
When it comes to buying stocks, Fidelity prides itself on its lack of fees—no account, no minimum, and no commission fees! To buy fractional shares in Fidelity Mobile®, simply enter the stock symbol (e.g. AMZN for Amazon) and the dollar amount you’ll invest, then the system will automatically determine the estimated fractional shares. They have access to more than 7,000 US stocks.
Even though these are fractional shares, you’d still receive dividends equivalent to your share percentage. However, they are non-transferable outside your chosen platform. You’d have to sell and cash them out first.
Discount Online Brokers
This option is great if you have enough funds to buy the minimum lot size (number of shares you buy in one transaction) of your chosen stocks. But to maximize all your profits and minimize expenses, it’s best to invest through discount online brokers. These are online platforms without any commission fees.
Traditionally, online brokers earn money through commissions. You pay them for their efficient systems that smoothly execute your order transactions at your most convenience, thanks to their technology.
However, there’s a recent trend, led by Robinhood, where online brokers can offer more ways for small-time investors to join the stock market. They have waived off commission fees, removed minimum account fees and most transaction fees, and offered fractional shares. Yes, you may wonder why they waived off fees when that’s how they earn. It’s because they see great potential in young investors—it’s more important to retain them. Besides, these brokers have other ways of earning outside of commissions.
Aside from Robinhood, Schwab, and Fidelity—there are more of them that have joined the trend, such as Webull, TD Ameritrade, E-Trade, etc. However, as part of a beginner investor’s research process, read in-depth reviews of each discount online broker to determine their pros and cons.
Starting Big vs. Starting Small
The amount of how much you’re going to invest in stocks is a risk in itself also.
When you start big, that means you’re willing to earn big as much as you’re also risking to lose. With huge amounts of money, you can buy a lot of shares from prestigious companies while having more room for portfolio diversification. You can have much more flexibility and freedom, but these will only work in your way if you know what you’re doing. That is, you have mastered both fundamental and technical analyses. Otherwise, at least have an experienced stockbroker give you expert advice on how to handle your large investments.
For beginners, it’s not recommended to start big. Beginner investors have so much to learn yet with managing the risks. Start slowly while you learn the ropes. Although, the main downsides with starting small are waiting a bit longer for your capital’s growth and having limited options. But what’s great today is that online stockbrokers are gaining momentum by innovating more ways for young and eager investors to join the stock market.
The sooner you start investing, the earlier you’re going to reap your rewards.
The advantage of today’s age is the technology that makes stock investing more accessible for low-to-middle-income beginner investors. All that’s left to do is exploit the widely available information with just a click of your mouse or a swipe of your fingers. Soon with adequate financial education, stock investing will become a common household name.
Our References and Further Readings